Yesterday's primary auction allowed the Ministry of Finance to borrow UAH11.5bn (US$415m)for budget financing. Despite the increased amount, interest rates were mostly unchanged.
With large debt payments of both UAH and FX-denominated bills approaching, the Ministry did not set limits for this offering. The bills offered yesterday have maturities starting next year. Therefore, auction results depended on rates requested by the bidders, and the MoF's readiness to accept these levels.
The most active yesterday was the placement of FX-denominated bills, which collected 23 bids with rates ranging from 3.2% to 3.85%. Total demand amounted to US$167m. However, US$1.1m of bids required an increase in rates from the previous, similar auction and were rejected. Interest rates, both, cut-off and weighted-average, were set at 3.39%, the same as the weighted-average rate this May.
However, demand for local-currency bills was large, but in just three bids: UAH4.5bn (US$168m) in a single bid for six-month bills, and UAH2bn (US$76m) in two bids for 1.5-year paper. A bid for the six-month bill was submitted with a 7.74% interest rate, the same level as the five-month bill in June; bidders for the 1.5-year instrument requested a small increase in rate.
Competitive demand for 1.5-year bills was submitted at a 10.25% interest rate or 5bp above the level set two weeks ago for this paper. Due to the size, the Ministry had to decide to increase the rate or refuse this demand. Large debt repayments approaching could have played the main role in the MoF's decision to accept this demand at a higher rate.
Generally, there is always demand for local-currency bills, but it is sometimes situational, such as prior to an NBU key policy revision with a high probability of a decrease, having access to the long-term refinancing loans that can become cheaper in a few days is probable. However, instability in the FX market forces small local investors to prefer FX-denominated bills, which allowed the Ministry to finance the budget and replenish FX accounts.
